INTERNAL UTILITY REFORMS THAT WORK: A REVIEW OF TRENDS

Transcription

1 INTERNAL UTILITY REFORMS THAT WORK: A REVIEW OF TRENDS Dr. Allen Eisendrath Senior Infrastructure Finance Specialist Office of Infrastructure & Engineering, USAID/Washington 1

2 KEY FEATURES OF SUCCESSFUL REFORMS Armenia, Australia, Brazil, Burkina Faso, Bulgaria, Chile, Colombia, Cote d Ivoire, Czech Republic, Egypt, Estonia, France, Germany, Hungary, Indonesia, Jordan, Latvia, Lithuania, Malaysia, Morocco, Netherlands, Poland, Romania, Russia, Senegal, Singapore, South Africa, Spain, Sweden, Thailand, Tunisia, UAE, Uganda, UK, US, Ukraine, Vietnam, Zambia New approaches to corporate governance Accountable, autonomous management Realistic business plans Progressive performance targets & attractive incentives Cost-based price setting Shifting from capital grants to grant/loan mixes PSP works but it s not the only way to reform 2

3 SUMMARY OF INTERNAL REFORMS WHAT ARE SOME OF THE INTERNAL REFORMS THAT DRIVE SUCCESS? Governance innovations Board of Director membership; bylaws; charter Management plans with progressive targets, a strategy and incentives Install a financial management system that supports the plan SBU and operating unit approaches System technical optimization MIS reform to support SBUs and performance monitoring Metering, billing and collection systems HR reforms: contracts; salary scales; incentives 3

4 TYPICAL STEPS TOWARD SUCCESSFUL REFORM Establish a new corporate governance framework Establish a competent management team Start with an As Is business model, including KPIs Create a business plan for transition Develop an operating agreement with shareholders including baseline, targets and incentives Prepare sub-plans for: Financial transition Commercial performance improvement Operational performance improvement Capital investments Staff development & incentivization 4

5 MOST REFORMS INVOLVE A PLANNED TRANSITION TO COST RECOVERY PLANNING TRANSITION TO COST RECOVERY Rs. per m Year Total Costs, incl. capital Direct Operating Costs Affordability Ceiling Tariff This is a cash subsidy requirement 5

6 FINANCIAL MANAGEMENT 12 Habits of Highly Successful CFOs 1. Fund balance reserve policy 2. Multi year financial forecasting 3. Monthly or quarterly financial reporting and monitoring 4. Contingency planning policy 5. Policies regarding non-recurring revenues 6. 5 yr capital planning incorporating operating costs of new facilities 7. Rapid debt retirement policies (65% in 10 years) 8. Debt affordability reviews and policies 9. Superior debt disclosure practices 10. Pay as you go capital funding policies 11. Financial reporting rewards 12. Budgeting rewards Source: 12 Habits of Highly Successful Finance Officers, Fitch Ratings Criteria Report 6

7 CORPORATE GOVERNANCE REFORM CORPORATIZATION & CORPORATE GOVERNANCE REFORM Many successful reforms start with improvements in corporate form and governance We looked at examples of excellent water utility corporate governance: Sydney Water, Australia Uganda National Water & Sewerage Corporation Aqaba Water Corporation, Jordan Copasa, Brazil Aqua, Poland It often starts with corporatization Put in place good corporate governance mechanisms Established performance incentives & penalties Board has obligation to put in place a performance plan Progressive performance targets along a glide path Ability to dismiss management when performance is poor 7

8 Utility has external autonomy CORPORATE GOVERNANCE REFORM CHARACTERISTICS OF WELL PERFORMING WATER UTILITIES Management can set salaries, Management strongly influences staff incentives, Management controls procurement, Supervisors and management influence tariffs, Management has some control over external borrowing Utility is externally accountability: well defined performance targets, independent external audit, effective but not necessarily independent regulator, subject to lender conditions, external parties in management oversight bodies 8

9 Internal accountability for results Rewards and penalties for chief executive for performance targets Staff subject to annual performance evaluation Rewards & penalties for employee achievement of performance targets Significant expenditure on staff training Market orientation Outsourcing of non-core functions Frequency of benchmarking CORPORATE GOVERNANCE REFORM CHARACTERISTICS OF WELL PERFORMING WATER UTILITIES Engaged in market research & market testing 9

10 BENCHMARKING Consumption of electricity by Lithuanian companies belonging to Group II in sewage collection in 2006 kwh (m 3 *H/100) high, m kwh SŪDUVA UTENA JONAVA MAŽEIKIAI TELŠIAI ŠILUTĖ DRUSKININKAI KĖDAINIAI PALANGA year Target 2006 year average value 0,767 high, m 10

11 Other regulators, inspectors LAWS, REGULATIONS City Administration (Client) Other regulators, inspectors PERFORMANCE CONTRACTS Example - Corporatised Eastern European water utility with performance based contract with City Bank & audit services Sources of Finance Environmental Responsibilities Domestic Charter & Performance Based Contract OWNERS (multiple shareholders) Board of Directors Corporate Governance Plan OJSC VODOKANAL Management Team Staff VK Business Plan Water & wastewater services Payments Customers Budget Organisations Suppliers Contractors Social & Public Responsibilities Commercial & Industrial 11

12 SYSTEM TECHNICAL OPTIMIZATION: ENERGY EFFICIENCY REDUCTION OF PRESSURE IN INTERIOR SYSTEMS PLUMBING FIXTURES REPAIR REDUCTION OF LOSSES IN APARTMENT BUILDINGS DISTRIBUTION OF FLOWS ACCORDING TO NEEDED PRESSURES Нововолинськ Червоноград Львів Луцьк Дубно Рівне Новоград- Волинський PRESSURE ZONES ESTABLISHMENT Коростень Чернігів Бровари Житомир Київ Полтава IMPROVEMENT OF PUMP STATION OPERATION PUMPING EQUIPMENT MATCHED TO NETWORK HYDRAULICS PUMP REPLACEMENT SHAVING OF IMPELLER Дрогобич Тернопіль Хмельницький Черкаси Комсомольськ Ізюм Калуш Кам янец- Подільський Івано- Франківськ Жмеринка Олександрія PROJECTS Лісичанськ Сніжне ASD PRESSURE ASJUSTMENT BY MOTOR SPEED REDUCTION Херсон Мелітополь Бердянськ Маріуполь PIPELINE INTERIOR CEMENT LINING US EQUIPMENT MOTOR REPLACEMENT ELIMINATION OF FLOW CIRCULATION AT PUMP STATIONS DISCONNECTION OF INEFFICIENT WELLS THREE-TIER TARIFF FOR ELECTRIC POWER LOCAL EQUIPMENT 12

13 SYSTEM TECHNICAL OPTIMIZATION: NRW REDUCTION CONTRACTING Selangor State, Malaysia: Largest NRW Contract to Date Water crisis combined with 40% collection loss & 25% leakage Cutting NRW by 50% allows 1.5 million people in K.L. to be supplied Contract awarded to design and implement NRW reduction activities Payment was agreed lump-sum, with incentives & penalties related to targets Contractor free to select zones in network Lump sum was calculated to cover all necessary activities including leak detection, repairs, equipment, establishing district metered areas, identifying illegal connections, and meter replacement Result of 18 month pilot phase: NRW reduced by 20,898 m3 per day vs. target of 18,540 m3 per day. Cost: $215 per m3 loss reduced Contract Phase II expanded to reduce additional 198,900 m3 NRW per day. Result after 4 of 9 years: 157,000 m3 per day NRW reduction. Pressure reduction valves were important part of the program

14 SYSTEM TECHNICAL OPTIMIZATION: BANGKOK MWA NRW REDUCTION CONTRACTS Characteristics of 3 MWA Water Loss Reduction Contracts Contractor Contractor 1 Contractor 2 MWA Branch Nonthaburi Sukhumvit Phasichareon Number of conections 99, , ,470 Initial pressure (avg.) (m) Initial NRW (M3/day) 146, , ,218 Initial NRW (l/conn./day) 1, ,096 Final NRW (m3/day) 106,300 97,353 64,313 NRW reduction (m3/day) 39,905 33,397 91,905 Final NRW (l/conn./day) 1, DMAs established Mains replacement (km) % of mains replaced Leak repairs 71,307 31,182 51,905 Leak survey (km) 15,158 8,933 21,649 Ratio of km lead survey to pipe length Total contract cost (US$) 16.3 million 17.3 million 22.6 million Cost per m3/day NRW reduction (US$) Source: World Bank Water Supply & Sanitation Sector Board Discussion Paper 8, December

15 Miljakovac 2 SYSTEM TECHNICAL OPTIMIZATION ZONAL MANAGEMENT EXAMPLE OF BELGRADE WATER & SEWERAGE COMPANY There are 35 consumption units in the Belgrade company. 27 are monitored by installed equipment + 8 occasionally monitored by mobile equipment. To reduce losses, systematic water accounting was installed in each division, with a manger for each division 15

16 Water balance at KOTEŽ KMM 3 Water inflow Invoiced water Water loss Measure unit m3/day l/s m3/day l/s m3/day Quantity 3004,21 34, ,20 25,08 837,01 l/s/km /km 4,54 3,28 l/s 9,69 1,26-27,86% in relation to measuring at KMM3 16

17 Pipe break repair 150 mm level 17

18 After repair, consumption reduced by 37 liters/sec 18

19 Bidders propose bulk supply price for a 5 year operating contract INNOVATIVE OPERATING CONTRACTS LATHUR TOWN (300,000 POPULATION) MAHARASHTRA, INDIA TRANSACTION DEVELOPED BY CRISIL INDIA Highest bulk price (per m3) wins the contract 3. Winning bidder operated water treatment plant, transmission, and distribution for a period of 5 years. All capex associated with customer connections and the tertiary network is operator responsibility. 4. System transfers back to Water Board at the end of 5 years 19

20 AGGREGATION THE LARGER THE UTILITY, THE LOWER THE COST PER UNIT Average price of water services in different groups of water enterprises in 2005 year 2 1,9 1,59 1,5 1,41 1,27 Euros 1 0,5 0 1st group (>2mln.m3) 2nd group (1-2 mln. m3) 3rd group (0,5-1 mln. m3) 4th group (0,25-0,5 mln.m3) 5th group (<0,25 mln.m3)

21 AGGREGATION: EFFICIENCY DATA BEFORE & AFTER FORMING A REGIONAL COMPANY EXAMPLE OF A ROMANIAN CITY UNIT 2005 (Before) 2006 (After) 2008 (Forecast) Water & sewage connections No. 41,921 67,665 76,905 Billed water & waste water Th. m 3 56,500 62,933 65,300 Monthly issued bills (average) No. 31,620 66,770 48,176 * Total incomes EURO 12,855,008 23,095,353 25,625,000 Turnover EURO 12,165,683 20,300,865 22,343,750 Operational expenditures EURO 10,189,441 16,676,750 18,343,750 Operational profit rate % 14,57 17,85 17,90 Specific water consumption l/day Maintenance & repairs/km of network Interest coverage rate for foreign credits No. 0,87 1,19 1,02 %

22 CAPITAL COST RECOVERY THE CAPITAL ASSET PROBLEM: WHO PAYS THE CAPITAL COSTS OF WATER & SANITATION? Surface Water Supply Pumps Groundwater & stream bed supply Storage Pumps Water Treatment Individual Groundwater Wells Distribution Network Elevated service reservoirs W A T E R U S E R S Septic Tanks Sewerage Drains Water Resource Management Bulk Water Supply Distribution Services Sanitation Services 22

23 THE UNREFORMED APPROACH TO CAPEX 23

24 TRENDS RELATED TO CAPITAL ASSETS The main trend is toward treating capital costs as part of the water & sanitation business. A second trend is gradual, step-wise transition to recovery of capital costs from consumers. CAPITAL COST RECOVERY A third trend is transition from grant-based capital financing to grant/loan mixes of financing. Critical to all of these is reform of the utility sector. Checking meters Reduction of losses; Breakeven on O&M costs; Building an effective business model; Revolving funds. In the end, reformed utilities use either revenue requirements or a GAAP/IAS approach. 24

25 Example of Transition to FCR: Hungarian water utility operating costs in billion HUF In percentage (%) of operating revenue (75,2 billion HUF) Materials 2,485 3,3 Energy 4,473 5,9 Depreciation + rental costs Wages and social security taxes 12,743 16,9 6,571 8,7 Reparation and servicing 4,847 6,4 Other direct costs 9,096 12,1 Indirect costs 10,499 13,9 Other expenditures 15,847 21,1 Sewage penalty 0,216 0,

26 Summary of Steps toward Successful Internal Reforms Establish a new corporate governance framework Establish a competent management team Start with an As Is business model, including KPIs Create a business plan for transition Develop an operating agreement with shareholders including baseline, targets and incentives Sub-plans for: Commercial performance improvement Operational performance improvement Capital investments Staff development & incentivization 26